Transcript No Slide Title

UK economic outlook and the implications for the
mortgage market
Stuart Porteous
September 2005
Economic backdrop
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We’ve never had it so good – 13 years of economic
growth and counting. Even better in Scotland!
But are the storm clouds gathering? Consumer
spending has slowed as higher interest rates, tax
payments and oil prices have taken a bite out of
take-home pay. A slower housing market may have
dented confidence.
The MPC voted to cut rates in August, but it was a
very close call. This cut will help, but will it be
enough?
The UK economy is on a roll: 52 quarters
of growth, and counting
Real GDP growth (%)
10
5
0
-5
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: National Statistics
Consumer spending has slowed sharply
Quarter on quarter
consumer spending growth
1.6%
1.4%
1.3%
1.3%
1.2%
10-year average = 0.9% (3.5% annual)
1.0%
0.8%
0.6%
0.6%
0.6%
0.4%
0.2%
0.2%
0.1%
0.0%
Q1 04
Q2 04
Q3 04
Q4 04
Q1 05
Q2 05
Source: National Statistics
The downturn has been led by retail sales and a
sharp slowdown in spending on ‘big ticket’ items…
110
All Retail Sales
Index (2003=100)
108
106
104
102
Household Goods Sales
100
98
2003
2004
2005
Source: National Statistics
…but the latest data point to an underlying
improvement.
3 month on 3 month
Retail Sales growth
0.8%
0.4%
0.0%
-0.4%
-0.8%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
National Statistics
The household balance sheet remains healthy,
but a growing minority of people are constrained
by high levels of debt
8
Household Wealth (LHS)
20%
7
Debt/Wealth(RHS)
18%
16%
6
14%
5
12%
10%
4
8%
3
6%
2
4%
1
2%
0
1988
0%
1990
1992
1994
Total Debt/Total Household Wealth
Household debt, wealth (£ trillion)
Household Debt (LHS)
1996
1998
2000
2002
2004
Source: Bank of England, National Statistics, ODPM
Mortgage interest payments
-15
Clothing & footwear
Leisure goods
Non-discretionary
Household goods
Personal goods & services
Household services
RPI
Earnings
Tobacco
Council tax & rates
Fares & other travel costs
Petrol & oil
Water & other charges
Fuel & light
% growth since Nov 03
Increases in unavoidable household costs are mopping
up liquidity and explain most of the change in consumer
behaviour
Discretionary
45
30
15
0
Spending growth is expected to recover, but we
are unlikely to see a return to the strong growth
of previous years
Annual consumer
spending growth
4%
3.7%
10 year average = 3.5%
3%
2.8%
2.8%
2.2%
2%
1.6%
1%
0%
2004
2005
2006
2007
2008
Source: National Statistics, RBS Group Economics
Where next for interest rates?
UK Base Rate
8
7
Forecast
6
%
5
4
"Neutral
range"
3
2
1
0
1993
1995
1997
1999
2001
2003
2005
What does mean for house prices
and mortgage lending?
The housing market also appears to be on
track for an orderly adjustment.
House Price Growth (RHS)
140
6%
130
120
4%
110
10 year average approvals
100
2%
90
80
70
House price growth (3m/3m)
Mortgage approvals (000s/month)
Approvals (LHS)
0%
2004
2005
Source: Bank of England, Nationwide
The regional house price gap is closing. All regions
(except Scotland) have seen annual house price
inflation slow since the start of 2005
Annual house price inflation (%)
25
Dec-04
Jun-05
20
15
10
5
So Eas
t
ut
h
W
es
t
Lo
n
So don
ut
h
Ea
st
Sc
ot
la
nd
W
a
N
or les
th
W
es
N
o
Yo
rth t
rk
Ea
s
st
&
H
um
Ea
be
st
r
M
i
d
W
la
es
nd
tM
s
id
la
nd
s
N
or
th
er
n
Ire
la
nd
0
Source: ODPM
There is sufficient momentum from past house
price rises to support mortgage lending at
current levels
Forecasts
35%
30%
Mortgage balances
25%
House prices
Annual growth
20%
15%
10%
5%
0%
-5%
-10%
-15%
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source: ODPM, CML, RBS Group Economics
First time buyers remain affordability
constrained. Interest rate cuts will help.
20
First time buyers (LHS)
New first time buyer loans (000s)
18
Mortgage interest payments (RHS)
50
16
14
40
12
30
10
8
20
6
4
10
2
0
Interest payments as a % of household income
60
0
2002
2003
2004
2005
Source: CML
Remortgaging shows no signs of slowing
Gross lending (£ million)
25,000
60%
50%
20,000
40%
15,000
30%
10,000
20%
5,000
10%
0
2001
0%
2002
2003
2004
2005
Source: CML
3 month moving average
30,000
House purchase
Remortgaging
Remortgaging as a share of total (RHS)
Conclusions
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The UK economy has had a rough time of late, but appears
to be through the worst of it.
Lower interest rates will keep the economy ticking over,
easing pressure on consumers. We expect one more cut to
get the economy back on track.
House price risks are subsiding as the housing market
stabilises across the UK
First time buyers remain affordability constrained, but there
is enough momentum in the market to keep activity at
current levels.
Remortgaging will remain a core part of the market, with
implications for pricing.
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